Spend Analysis Pro Tips

“How far back should we look,” this is among the first questions a Procurement team should ask themselves when collecting data for a spend analysis. The answer depends on the type of product or service you’re in the market for. For commodity purchases, a year’s worth of data is typically sufficient. A month worth of office supply orders won’t tell us much about typical usage.

Sometimes it’s necessary to go back even further. Take Capital Expenses, for example. Several years might pass between these purchases, and these periods will likely prove relevant to your analysis. The moral of the story? Failing to collect enough historical spend data poses considerable risks. At a minimum, you could find yourself developing an inaccurate or ineffective market basket for your sourcing initiative. Worst still, you might mistakenly exclude important supplier relationships from your analysis.

You’re probably familiar with the phrase less is more. When it comes to spend analysis, that old cliche most definitely applies.

Throughout a spend analysis, it’s often tempting to take a deep dive into highly-granular spend data. Many expensive platforms exacerbate the issue. They bombard Procurement teams with a level of detail that’s certainly nice to have, but mostly just distracts from the real work of cost reduction initiatives. Kicking off a strategic sourcing campaign rarely requires more than a few essential data points.

Think of spend analysis as a map. The details it provides should help you get from Point A (your current spend profile) to Point B (savings) as easily as possible. Attempting to make this journey using an excessively detailed report is a lot like trying to drive cross-country with a topographical map. When all you’re trying to do is get to California in one piece, it’s not all that important to know your elevation.

There’s a time and a place for highly detailed spend analyses. Once you’ve identified a clear path toward savings, your Procurement team can take a look at whatever details it pleases. Just remember, granular analysis without an established strategy will only lead to wasted time and missed opportunities.

Collecting historical data has benefits well beyond revealing missing data. Comparing supplier data year-over-year enables your Procurement team to observe emerging trends. For example, you might observe a drastic increase or decline in spend with a specific supplier. What might a $100,000 drop in spend over a year tell you about a specific supplier relationship? Quite a lot.

This is no random example. As companies move away from physical printed materials to digital alternatives, spend for commercial printing has plummeted year-over-year. Is it worth your company’s time to continue spending any money on a supplier who might not be around in the near future? Almost certainly not.

Taking a close, regular look at your historical spend can prove enlightening. You’ll better understand how your purchases have evolved and better maintain a fluid sourcing strategy.

Improper cleansing techniques can make it difficult or impossible to take an accurate look at the supplier landscape. It might require a little elbow grease, but it’s important to identify discrepancies in naming conventions, duplicates, and other recording errors when assessing your spend data.

AT&T, for example, presents a number of opportunities to run into trouble. Your spend analysis system could classify this organization in a number of different ways. AT&T, AT and T, ATT, and A T T are just a few of the different ways you might designate the vendor.

These issues become more pronounced when multiple supplier databases are maintained separately, communication between business units is sporadic, or when separate databases are combined haphazardly. The supplier fragmentation caused by inconsistent naming can make large suppliers appear insignificant and compromise your analysis.

From the outside, spend analysis can look daunting. Once you’re engaged in a spend analysis, the process can grow both tedious and time consuming. This is particularly true when your Procurement team is forced to contend with a large and diverse supply base.

Procurement departments can easily feel tempted to neglect smaller suppliers or apply broad stroke strategies in their spend analysis. In the name of saving time and effort, they cut corners and wind up creating much more work for themselves down the road.

It’s absolutely essential to fully invest in analyzing your spend data and supply base. By reaching out to stakeholders and developing a working understanding of their universe, you’ll establish a foundation for effective strategic sourcing initiatives.

Rest assured, spend analysis mistakes are generally interconnected. An error – improper cleansing, for example – sets your Procurement team up for a series of related errors. Each successive error will compound your lost savings and bring additional headaches to the process of spend analysis.

Extreme caution and close attention are essential from the very start of your spend analyses. Effectively preparing for your initiative is a great first step. Ensure you’ve got the right team, armed with the right tools and techniques.

Once your spend analysis is underway, take care to remain conscious of every potential stumbling block. Maintain close communication with all relevant stakeholders and take care not to trust your automated systems too much. With any luck, you’ll avoid a string of initiative-halting mistakes.

Just because your data is clean right now doesn’t mean it’s going to stay that way. Maintaining data cleanliness is an ongoing, all-important task.

Over the years, your company will not only collect additional data, but priorities and rules for governing data will evolve. Establish a regular schedule for assessing spend your data to address new purchasing trends and determine whether your rules still apply.

With regular assessments and cleanses, you’ll better ensure the long-term cleanliness of your data.

Businesses and their spend patterns change.  Some of these changes might invalidate the taxonomies you use to classify and catalog spend. Be mindful of activities that might necessitate a change and develop plans for implementing these changes.